Every so often, you come across somebody who challenges the status quo with gutsy bravado, so when Pete Comley invited me to take a read of his free ebook on Monkey with a Pin (MwaP) about how various trials and tribulations mean private investors achieve nowhere near the returns they are led to expect on the stock market I took him up on it.

Monkey with a Pin is a well-researched diatribe on the ways that the financial industry fleeces the common man of nearly all of any gains he may achieve on the markets, and where gains aren’t achieved they take fees anyway. Just because they can.

It’s hard to argue with MwaP as a comprehensive statement of the problem. However, while there were lots of good recommendations in how to reduce the chances of getting fleeced in charges, I did find it lacking in actionable responses to the more general problem of realising a real return on investment in these desperate post-credit-crunch times.

Pete Comley says that he hopes that new investors should not be put off investing by his ebook. I’m not so sure that would be a rational response from them – the take-way I got from the book is basically for private investors old and new is

Step away from your online trading account. Very slowly. And observe Comleys Laws of Private Investing, taking after two of the Three Laws of Thermodynamics:

You can’t Win, because it’s a closed system

You Can’t Break Even either, because fees and charges leak away about 6% of any gains to be had. And the gains were only 5% in the first place, so result misery.

It’s a great read, and challenges many of the shibboleths of investing, in particular the 5% real ROI that is often bandied about, showing that this conveniently ignores all the dead companies littering the landscape. The finance industry comes in for a good kicking as well along the way as a whole range of nastly little sharp practices are exposed. If nothing else, it will ram home that you need to keep these guys’ hands out of the till as much as possible. A lot of that is up to you, in how you invest as well as what you invest in.

You should minimise your churn – I would venture that even the 100% annual churn that Pete Comley warns against is far, far, too high. Mine was 65% in year 2010/11 and 17% in 2011/12, and even those are too high. The first is because of some rank stupidity with BP and reorienting the direction to a HYP, the second due to some minor stupidity with BARC last year

I had come independently to his second insight, which is that you should also buy/sell in significant chunks (>£2000 for typical UK broker charges).

Monevator/TA had already warmed me up to the value of low-cost index funds such as HSBC’s FTAS and L&G’s LGAAAK as a low cost alternative to the ETF passive approach I had initially used, and MwaP reiterated this. I’ve never been drawn to managed funds, though I do favour investment trusts at times. And managed funds of funds looked like a swampy fees quagmire to me, though Vanguard’s LifeStrategy fund is arguably a passive fund of passive funds, which I’m considering for an eventual main index holding.

Index investing – a different view on why it works

Comley made a case for the benefits of index investing which was much easier for me to appreciate than anything I had found before. Although I could see from Monevator/TA the low-cost aspects, the analytical reason why index investing would be expected to have an edge on an investor buying typical index components seems to be that the index automatically kicks out the dogs that go bust, effectively dynamically rebalancing. This ‘survivorship bias’ is meant to be worth about 1% p.a. I hadn’t understood that before, nor had a feel for just how many firms do go bust over the years, and that gives me a more favourable view of index investing that just following all the other sheeple…

Am I a typical Pinless Monkey?

Statistically, I unlikely to have investing ‘hot hands’, i.e. an innate talent greater than my peers lying far outside chance. I’ve learned a lot of the issues in the book the hard way – as a speculator in the dotcom bust I churned, chased momentum, sold low and bought high, you name it. I did learn to avoid those things, indeed I feel a lot of investment success is avoiding the pitfalls rather than finding ten-baggers. Although the story of ten- and twenty-baggers is exciting, the main thing is learning to survive in the investment jungle, particularly if you are a stock-picker rather than an index tracker.

Over the last five years, I haven’t bought any stocks that doubled in price (with the exception of Sharesave holdings of The Firm bought in its existential crisis in 2009, which don’t count as I haven’t taken delivery of them yet) never mind went up tenfold, whereas in the dotcom era I did have this. However, I haven’t held any stocks so far that have gone down the pan, which I had in the dot-com bust. None of my current stocks have dropped by more than a third. The liquidation value is about 4% up on the total invested over two and a half years. It’s hard to know what that means, because of the shocking volatility of the capital value – the 4% has been up to 7% and down to -7% over the last year, and it ignores some dividend income that appeared as cash in the ISA. There’s just not enough data to say anything useful.

A Different Perspective on Cash

For various reasons, I hold much more cash than I would like, because the path of my future had a lot of uncertainty in it. It is about 50% of my post-tax financial assets and 100% of my AVC holdings now. I really hate cash as an asset class, silently wasting away every year without so much as by your leave. At least a good hunk of it is in NS&I ILSCs to which that doesn’t apply. I just don’t have Rob’s equanimity about cash, it’s a wasting asset in my view.

Some of that hatred is due to the bad press the financial industry gives cash, by not allowing for the fact that private individuals can get better rates than their benchmark, the Treasury rate. I didn’t really understand that beforehand, and it seems to have come as a surprise to Pete Comley too, so hat tip there for the heads up. I still hate cash as an asset class, but perhaps I should look more kindly on it given the rottenness of the alternatives!

Conclusion – All hope abandon ye who enter here

I learned a lot and got to see things with different eyes from reading MwaP. However, the overall message I took away was somewhat cheerless, it is basically as far as stock market investing is concerned,

The takeaway message for me as far as the stockmarket for private investors is the inscription above the gates of Hell in Dante's Divine Comedy - All hope abandon ye who enter here

I couldn’t see the up-side. My feeling is that on the whole the reason stockmarket investing should work is because you’re effectively buying a slice of a company, which is a real operation that is creating real value somewhere, and that people will beat a path to its door in search of that. I know, it’s sometimes hard to see where the benefit is in somewhere like MacDonald’s, or Goldman Sachs, but anyway, I’ll pinch the words from Warren Buffett speaking in 2011

My own preference — and you knew this was coming — is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See’s Candy meet that double-barreled test.

It is possible that I misunderstood the thrust of Pete Comley’s work, but he appears to discount the validity of one possible response to the costs he correctly rails against. That is to buy and hold. Unfortunately, Comley comes to the conclusion that we are in a secular bear market (it’s a real pain that you can’t reference an ebook! The best my Kindle says is Location 2827 of 3880)

Buy and hold is predicated on the assumption that the market will offer a good rate of return. That seems unlikely in future.

To some extent I agree with him when he modifies that by

… strategy likely to be effective until the next secular bull market arrives is one of buying shares only when they are very cheap by historical standards and then holding them.

Cheap in this case is for the S&P to have a CAPE of 5, rather than the current 20-ish which is above the long-run average of 15.

I entered the market with my AVCs in March 2009, just after I misinterpreted a performance review that I was headed out of The Firm. At the time everybody was down on shares, and indeed I also thought the centre wouldn’t hold. It seemed worth a go, however, because I was otherwise doomed anyway – I hadn’t made enough preparation to retire early. The next week I read this which stiffened the spine somewhat, and I hit the global index fund AVCs hard with over 2/3 of my salary for a few months.

I liquidated that in March, turning it to cash. It was 20% up (though inflation has eaten 10% of the value of money since March 2009). It is easier for someone who believes that they have nothing to lose to take action in a crisis than someone who fears the loss of all they have in the status quo. My hope is that having threaded my way through the eye of the needle once I may do so again, for instance when the Euronuts finally raise the white flag over the twisted wreckage and surrender to the tanks of reality crushing their dreams of one single currency to bind them all. In that maelstrom fortune may favour the independent of thought, though as MwaP says,

such periods are so accompanied by ones of negativity, extreme volatility and downright repulsion for shares that you have to be an extremely well-disciplined and far-sighted investor to take advantage of them.

Therein lies the rub. To get exceptional results, you have to take exceptional actions. Fly into the storm, when all around are flying away. What does not kill you makes you stronger.

Perhaps my inner Virgil paused at the gates when my Dante went through the arch and lost his way. I can see how readers might be able to use MwaP to hugely reduce their losses, and that alone makes it definitely worth a read. But I’m damned if I can see how they might be able to use it to improve their gains. If it encourages future victims of the rapacious financial services industry to exit their brokerage accounts and sit firmly on their hands then perhaps that’s good enough 😉

I’ve had the approach from author Pete that it seems we all got, but I haven’t had a chance to read his book yet and respond.

So I best not do it here. Needless to say, though, the conclusion that you should use low-cost trackers and not market time is a sound one for nearly everyone. (The risk of holding any active shares, like BP, is that you will underperform. You can’t have your cake (higher yield) and expect to eat it too (guaranteed to match or beat the market).

If I can be forgiven a few links, one big reason why the average investor underperforms is because flow of fund returns differs from investment returns.

i.e. They don’t invest when markets are low, and the follow what’s hot. See the data about halfway down here:

Again, I don’t subscribe to the view that one should be investing through the sturm and drang of a bear market to make me popular. (It doesn’t! Saying the world is doomed, ironically, would, in blogging terms. ) I say it because if you don’t invest in the bad times, too, then you can throw market returns out of the window, as MWaP seems to suggest from what I’ve read.

As for cash, I love it as an asset class for private investors specifically because we’re not institutions:

he conclusion that you should use low-cost trackers and not market time is a sound one for nearly everyone.

At the risk of prejudicing your reading 😉 the message I got was Pete was suggesting both using trackers and market timing as the key. The mischievous ermine would say you’re no a stranger to the concept yourself, though I wouldn’t say you advocate using it of course 😉

I was a jerk with BP. I didn’t follow my values, and ate the crow. It was a fair cop. It had been a long time since the dotcom bust, and I was an index investor ‘twixt then and 2009 so I had forgotten some lessons. Had I followed my values and beliefs I’d a) still have BP and b) done okay on it!

What I hate about cash is all that pain to switch accounts. it may well be true that

UK investor chasing the best saving rates from 2000 to 2010 would have seen their money grow by a very impressive 70%.

but the poor devil would be run ragged chasing those best savings rates! Plus all the fun and gamves about fixed interest, term accounts etc. Holding cash is almost as complex as some shares – indeed you can’t determine the best accounts analytically looking forward (because it depends on what new accounts are introduced and what interest rates do). This this exercise can only be done in hindsight. With those terms I reckon you could say a stock market investor chasing the best stocks 2000 to 2010 would do a darn sight better than 70%, given the benefit of hindsight 😉

Having said that, your FT article points the way to do this is yearly fixed interest, and since I may elect to be a non-taxpayer this year this approach could well be worth the fight for me, since my cash vehicle of choice (NS&I) doesn’t appear to be available this year and due to the amounts involved the prize is worth it. I’ll be very surprised to beat RPI inflation, even if I manage to reclaim tax on it!

The book is a good read, and it will be interesting to hear what someone with a more cheerful and less nervous disposition makes of it!

Maybe I best add a few comments to the mix. The reason I like cash vehicles is because you get a predictable return with no risk. You don’t quite get this with bonds (there is risk) and you certainly don’t with stocks. I’d put my cash element in an ISA over time and put 40% in your traditional long term ISA on fixed-rate and fixed-length accounts (right now that’s 3.3%, but in the noughties it was 6% and inflation was low). Other 60% would be in a bond in an ISA that would give the larger of RPI or a fixed rate of interest (you could get 4.3% right now). I see such a component as vital to balance the volatility and risk of stocks, although the weighting between cash and stocks will vary depending on how much volatility or risk might affect you (for me I have 100% stock weighting at the moment because the risks are acceptable). Right now inflation is high compared to interest rates, but it need not always be so, as far as I can tell there is a negative correlation between the two.

As for stock picking. I think you can do well, but you have to have a reason for doing better than anyone else. I enjoy a kick-about at the park and have just come back from football, but that doesn’t mean I’m a better than average footballer. However, there are footballers who are very good because they have more experience and have developed better intuition than me. The same applies for stock picking. Devote your life to it and you’ll do well, don’t devote your life to it and you need to hope to get lucky.

I would say buy and hold has to be the cornerstone of any long term investing strategy. If it fails, owing to an indefinitely long secular bear market, investment performance won’t be a priority concern.

Had I not had cash in 2009, I’d be less happy now. It’s an enabler, not an investment. It’s sad to see it waste away through inflation, but that won’t always be the case. Long term, I think it makes around 0.5% in real terms. I cope by rotating three or four 1 year cash bonds so that, every quarter or so, I get some cash to dispose of, either into shares or another cash bond.

For me, equities are mainly about divis, a future income stream that will, hopefully, grow a little in real terms. I track prices, of course, and trade occasionally, but I try to Buffetise mostly.

I have one remaining fund in European equities which I plan to exit when (if?) there is sufficient market uplift to enable me to beat, temporarily, recent fees.

> The reason I like cash vehicles is because you get a predictable return with no risk.

Aha, you’ve never met my great-grandmother. Only when you hear the tone of voice of how people tell you the story of losing their life savings to inflation do you understand that cash is most definitely not something with no risk. This hasn’t been experienced in my working lifetime, nor yours (I was a teenager in the 1970s hyperinflation, which was Britain’s last experience of that). I fully expect to see hyperinflation again in my lifetime, and I virtually guarantee you will see it in yours. The German experience was for different reasons, but nowadays hyperinflation is how democratic governments reconcile their lofty promises to the electorate with the modest wealth creating capacity of the electorate

The Germans aren’t charging around Europe like nutcases demanding suicidal fiscal retrenchment because they are trying to build the Fourth Reich or punish the profligate PIIGS. They are doing it because they are still shit scared of hyperinflation. They made sure it hasn’t happened for four generations, and they’re not taking any chances now.

The story I heard from my great grandmother is still part of the race memory in Germany of what happens when money dies. As they run from this old fear, they aren’t looking at other spectres they may be inducing in Euroland, because they can only run away from one thing at a time.

Cash is not a safe investment, by any means. It is safe 99% of the time, but roughly once in a lifetime it seems to lose a lot of value in a short space of time. It excels as a medium of interchange, but it sucks as a store of value.

@SG Gripes about cash notwithstanding, I like your idea of a ladder of 1 year cash bonds, and I may follow suit for this year at least. It seems to be the principle behind Monevator’s FT link from his article

Still beats me how you get the ‘best’ cash rates without knowing what inflation will do in advance. And I still prefer the simplicity of NS&I ILSCs – that’s probably the best chance of surviving moderate hyperinflation and crawling from the wreckage with some cash wealth intact 😉

I take the same line as you do with equities for now, perhaps moving future investment to a slug of that Vanguard fund. Although MwaP convinced me that the returns on shares were a lot more marginal than I’d thought, I wasn’t totally convinced that cash is a better place to be, which was the conclusion of several of his illustrations.

Thanks for the feedback all. I have put a link up to it on the monkey website.

You are right that 100% PTR is too high, but even that will be a challenge to some of the new investors I spoke with, hence setting the hurdle low (or do I mean high?)

Over “buy and hold”, I’m not against it as a concept. It makes sense for many reasons. It is the blind faith in it and the assumption that you can still make it work so well in a secular bear market that I was pointing out the problem with.

I do hope that people don’t take out that they should abandon all hope. Having said that, for those who don’t want to take the time to fully understand the system and how to play it, they probably would be better off in cash for the time being.

There will however come a time when we return to the secular bull market days and even ordinary people can make a return again (even allowing for losing 6%). I just don’t see that happening for a few years yet. In the meantime, they are probably better in cash and hoping the Weimar republic days of hyperinflation don’t get them.

Having said that, you queried how the book might improve their gains. The answer there lies in acting like a panther (and Buffett come to that). You lie in wait for the prey to get weak, then you pounce. The rest of the time, you just take a boat out on those lovely Suffolk broads.

@Ermine… by risk I mean the risk of volatility and absolute loss. I do think I have been cleverer than you might think with my cash allocation and if you forgive the link (I can’t get tables in a comment) I’ll show you why:

@ermine — To get the ‘best’ cash rate in that context, you’d just pick the highest yielding fixed one-year account.

Inflation is irrelevant to your choice (it will affect all the cash accounts similarly). For this undertaking it’s not about comparing with NS&I linkers or similar; you may want to do that, but it lies outside the terms of rate tarting every year.

I don’t think it’s really too hard to move cash about once a year, particular now that the FSA has upped the protection level to £85K. Eventually you’ll have to run 2/3/more accounts if you like a big slug of cash and you’re well over £1/2 a million, but most people aren’t in that category.

As alluded to above, one reason chasing cash rates worked in the 2000s is that banks were offering high interest rates, perhaps as a loss leader.

Another reason was probably that banks like the Irish and Icelandic banks came in with very high rates. We know what happened there, but individual UK savers all got there money back. I don’t think it’s a reason to avoid rate-tarting, but it is a reason to check you’re covered.

Of course I think the fact we’re even having this conversation is a bear market hangover. 😉

You are right that 100% PTR is too high, but even that will be a challenge to some of the new investors I spoke with, hence setting the hurdle low (or do I mean high?)

Don’t soften the message, let ’em have it straight between the eyes, it’s for their own good One of the valuable services your book provides is just how hard it is. I’m not sure even Warren Buffett could make money with a 100% PTR! One of these days I’ll stick up a photo of the folder I have with contract notes from my dotcom days as a salutary lesson – Do Not Churn.

An interesting perspective, that there will be a return to the 1980-1999 sort of bull market. If the premise in your book holds (that this period was the delayed result of going off the gold standard)

The massive growth of the stock market during the 1980s and 1990s was unusual from a historical perspective. This was probably a result of the creation of infinite money supply by removing the gold standard, although demographics may also have played their part. MwaP Location 428 of 3880

then I am not sure this would be expected to happen. They can’t come off the Gold Standard twice

@Monevator, Take your point about chasing the best rate once a year. Mind you, you then go on to say

banks like the Irish and Icelandic banks came in with very high rates. We know what happened there, but individual UK savers all got their money back.

Which is true, but they had a pretty stressful time of it and were denied access for random lengths of time. For a safe, “risk-free” asset class cash is rather a troublesome beast it seems!

I may take up that option, which gets the thumbs up from the FT, you and Rob. I have a few S&S ISA’s worth of cash coming my way in the next few months and need to find a home for it. Though the Ermine still pines for the indolence of NS&I’s elegant proposition, but not to be had this year.

I have no idea what will cause the start of the next secular bull market, but something will. Last time it was coming off the gold standard. “History doth rhyme but it doth not repeat itself”. It will not be such a thing again (nor can it be of course).

There is certainly a lot of cash around in corporate piggy banks but that in itself will not be enough in my view.

My guess is the answer lies somewhere in the east, though probably not until they’ve had a correction.

The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
…
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

A secular market trend is a long-term trend that lasts 5 to 25 years and consists of a series of primary trends. A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets.

As others have posted above, I am a big fan of rate tarting and switching in cash and cash ISA accounts. Sure, it’s a painful process rebalancing each year, but less painful than selecting shares and/or timing equity or index investments (which I also do, extensively).

I do think there is a danger of continuation bias in the current assertions from all sides (most with vested interest in perpetuating it) that cash will always lose out against inflation. In my experience over many years this is simply not the case, especially if you swap to beter rates and also play some instant access benefits off against tie-ins for parts of your cash portfolio.

There are several websites with calculators that prove the point – one such, at http://swanlowpark.co.uk/svad0901.jsp shows how since 1980 there have been no 5 pr 10 years periods where inflation has outpaced even the average of several normal instant access accounts. I would contend that it’s even better than shown on that calculator as in every year for which I have records (just the last 10 or so) I have obtained far better rates than the averages used here. For example the site says current savings rate is 2.75% which I am sure is true, on average. But I am getting 3.3% on instant access ISA, 4.1% on a 2 year fixed ISA and 3-4% in combinations of instant to 2 year fixed in regular savings accounts. So, tax aside I am getting around 3.5% at the moment, and around 3% after tax on my mix of savings.

Add in some PIBS and Prefs in the likes of LLoyds, Co-op, Enterprise Inns at averages of 9%, tax free dividends in my HYP ISA I’m currently averaging 5.2% income on my savings mix.

To be fair, the 70s throw much of the above out of the window, but over long periods, at best rates, cash simply does not lose out to inflation. Sod’s law of course now means we probably will he a 10 year period like the 70s again! I doubt, however, that it would happen.

On the subject of investment returns and beating the Monkey – I find it’s actually not that hard to beat the market, but it’s hard to hold the gains. Greed is a major factor in our inability to beat the market. I have never worked it out, and may well do so, but knowing the volatility of the markets I am certain that a disciplined approach, buying an index when below average value and selling soon after reversion above average, then repeating but not chasing he outperformance will mean you will do very well. Hard to do though.

[…] and yet so likely to lead to the sort of investment death that Pete Comley grouched about in his Monkey with a Pin book. With a growth share you just have to sweat it out or take the hit, there’s no Third […]